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REEBOK OF AMERICA INC.
Reebok USA., Ltd was formed in 1979 by Paul Fireman. The original marketing strategy was aimed at prestige and at high prices. In the beginning, the company had little luck in penetrating the market, and in 1981, PLC, a British wholesaler of footwear acquired 56 percent of the common stock in exchange for $77,500 in cash. Fireman and PLC agreed that neither party would sell its stock to third parties.
A few years later, Reebok's sales exceeded $1.5 million and the company contracted with a South Korean firm to manufacture the shoes. In 1982, the company introduces the first woman's athletic shoe. Sales rose to $3.5 million in 1982, and in 1983 the sales increased to $12.8 million. By 1985, Reebok's sales reached $307 million. The same year, Reebok International and Reebok USA., Ltd merged and Reebok International, Ltd was formed. Stock was issued to the public at $6, and in 1986 the price of one share rose to stunning $38.
In 1986, Reebok gave PLC the exclusive right to control, inspection and shipment of finished goods from South East Asia. Reebok pays the subsidiary 4% on the first sales of $100 million, 3% on the second, 2% on the second and finally 1% on of all purchases exceeding $300. At the same time, Fireman was elected chairman of the company.
In 1987, Fireman set the goal of becoming a $2 billion dollar multinational firm by the year 1990. This was to be achieved by acquisitions, internal development, and international expansion. The company puts heavy emphasis on consumer research, and on research and development activities.
Several horizontal acquisitions have been made by Reebok. Rockport company, a manufacturer of high-performance walking shoes was acquired in 1986. Rockport would become the most dominant name in the walking shoe industry. In April 1987, Reebok purchased Avia Group International, an Oregon-based athletic shoe company. This acquisition effectively combined two of the fastest-growing athletic footwear makers. Furthermore, in September 1987, Reebok purchased Ellesse International S.p.A., and Italian sportswear manufacturer for its shaky apparel division which was not doing too well.
Presently. Reebok characterizes itself a "marketing-type company", dealing mainly in sporting goods and leisure products with an upper-scale image.
SWOT Analysis.
The internal strengths of Reebok relative to its competitions is all of the following. First, the company's financial position is extremely strong. The financial growth of Reebok has been phenomenal. According to Forbes, the company enjoyed the highest growth rates from 1983-1987, and sales has continued to increase since that. With very few manufacturing facilities, Reebok has a high level of liquidity (current ratios exceeding 2.0). Furthermore, earnings per share has increased, and revenues increased from $12.8 million in 1983 to more than $1.8 billion in 1989. Furthermore, the company has operated with minimal long-term debt, and has the financial resources to invest in new market niches.
Secondly, Reebok International is more diversified than the competition. The company markets a wide array of show-wear, which has been possible by early strategic acquisitions of reputable companies. For instance, Rockport is the most dominant brand in the walking shoe industry. Also, Reebok is a clear market leader in the tennis shoe market.
In addition, Reebok's brand image stands for quality, the latest technology and prestige. The company has been in business for a longer time than any of the competition, and the company has been able to create favorable brand recognition. Moreover, Reebok's top management is highly marketing oriented, and most of the key personnel come from a marketing background. This is a strength in this business, since the industry is market driven instead of product driven. Also, an increase in demand is the expected market trend.
The weaknesses of Reebok International includes all of the following. First, the management. After that Joseph Labonte and Mark Goldston both reigned, Fireman is the chairman, president, and the CEO of Reebok. The company is highly dependent on one single person, who will not be able to effectively handle all of the required tasks. Also, in the new reorganization, AVIA is no longer represented in group of four operating corporate officers. This could cause internal tensions within the corporation. I believe that there is a conflict of interest in the top management, between the entrepreneurial like character Fireman and "the spirit of his company." The resignations of Labonete and Goldston came as a result of their management styles conflicting with those of Fireman. Moreover, Reebok's main product-line weakness is in its apparel division.
The opportunities of Reebok are the following. Continue market diversification and expansion into international markets in search for new potential customers. Furthermore, by diversifying into multinational markets it may be possible to pro-long the very short product life cycles in the industry by manipulating the marketing of different product niches in different nations. For instance, if the sale of one product-line is declining in the USA, the same product may be launched in South East Asia, and vice versa. The financial strength of the company makes it possible for Reebok to continue to ensure market leadership with effective research and development strategies. It is very important in this industry t make sure that you are on top-of-the-line in all products. Moreover, I still believe that there is potential for growth in the apparel industry, and that Reebok should focus on merging or purchasing a well-known apparel manufacturer. Reebok's strong product name should do well on clothes and accessories.
The external threats that are impacting on the company's operations are concentrated to competitive threats, litigation's, and in the manufacturing arena. First, the harsh competition from the main competitors in the industry is significant. To keep-up with the competition's penetrating efforts will cost a lot of money and put a lot of pressure on marketing and research and development. Also, the short product life cycles play an important role in the return on investment in a particular product line. Furthermore, weakening markets may be a serious threat to Reebok. Are people willing to invest hundreds of dollars into a pair of jogging shoes? In a weakening economy that is highly questionable.
The most serious threat however is NAFTA. Since Reebok is manufacturing most of its products in South East Asia, local content laws of production may seriously impact on the company's profitability. High tariffs and other non tariff regulations may be imposed on the company foreign manufactured goods. In 1991, the USA alone accounted for 69 percent of Reebok's total sales. (Please refer to graph #1) Also, manufacturing and labor costs will increase in South East Asia, and Reebok will confront higher costs of goods sold accounts, which will directly impact on the net income.
Main characteristics of the athletic shoe industry
The athletic shoe wear industry is unique in the way it is market driven instead of product driven. Markets have to be created and so does demand for the products. The industry is vertially controlled by fads, which are nearly impossible to predict. The athletic shoe industry must be able to quickly react to new market demands, and quickly develop product variations that will "satisfy fad-hungry customers".
Furthermore, the characteristics of the shoe-business can be identified with the entertainment industry, where the products have short-life cycles, and success depends on the fact that what is flashy and "hot" will sell. Today's athletic shoe market is a mixture between fashion and technology. Some competitive distinction has to be created together with a fashionable image.
As new product lines are invented and introduced, the overall sale in the market will increase. Presently, Reebok and Nike are the principal players in the industry, which sold 200 million pairs of brand-name athletic shoes a year.
Porter's Five Forces analysis of the industry.
Porter's Five Forces model focuses on the external environment, and how it may impact on the operations of the businesses in a particular industry.
The threat of new entrants into the industry is low. The entrance barriers are high in that the capital requirements are high due to up-front advertising and research and development. Also, economies of scale in production will be difficult to reach due to the difficulties of penetrating the market which is dominated by the large five; Nike, Reebok, Coverse, LA Gear, and Stride-Rite. Furthermore, it will be almost impossible to achieve product differentiation in terms of brand identification and product difference, since the "big five" set the trends. Also, distribution channels, and dealers are in many cases tied-up by existing competitors. The bargaining power of consumers is medium to low. The purchases of the buyer group is not concentrated in large volumes, and the products that the consumer purchases are not standardized. Furthermore, the industry sets and creates the fags and determines what is "hot".
The bargaining power of suppliers is medium to high since it is dominated by relatively few companies. The product is unique, and the switching costs are high. It is also possible for the suppliers (especially in foreign manufacturing) to integrate forwards into the industry's business (in overseas markets) and become a rival to the industry.
The threat of substitute products is low. The industry is upgrading the products frequently to cope with flashy fads and the "hottest" fashion. There are not too many close substitute products to athletic shoes. What else would you wear when you run? Of course, multipurpose shoes such as "cross trainers" may impose a possible substitute threat to the current highly diversified range of athletic shoes on the market.
Jockeying among existing competitors is extremely high. Competitors are numerous and are roughly equal in size and in power (Reebok versus Nike). Many of the product lines lack differentiation (most of the shoes look different, but they are basically the same). The products are highly "perishable", and the product life cycles are extremely short. Lastly, the rivals are diverse in strategies, origins and personalities. Each one of the major players are identified with a certain marketing approach, symbolized by the paid support of famous sport stars.
Strategies chosen by Paul Fireman that led to the amazing performance of Reebok during the 1980's.
First, Fireman chose to apply a concentrated growth strategy. He chose to introduce only three styles of running shoes for men, in a single market (USA). He directed organizational resources to the profitable growth of one single product line, by utilizing excellent marketing techniques and effective promotion programs. Following the initial strategy, Fireman started to apply a product development strategy by the implementation of women's aerobic shoes. Later, he decided to launch a product line of tennis shoes. By applying a product development strategy, Reebok was to take advantage of a favorable reputation/brand name, pro-long product life-cycles of current products, and finally the company was able to attract satisfied customers to new products. The strategy following the product development strategy was a market development strategy. Fireman now concentrated growth on national and international expansion. Also, he started to attract other market segments. Finally, Fireman focused on horizontal integration. Reebok's long term strategy of growth was predominantly based on acquisition of similar firms operating in the same market. This would eliminate potential competitors, provide access to new markets, greatly expand operations, and finally improve the company's diversification of its product line.
Reebok has made several horizontal acquisitions. Rockport company, a manufacturer of high-performance walking shoes was acquired in 1986. Rockport would become the most dominant name in the walking shoe industry. In April 1987, Reebok purchased Avia Group International, an Oregon-based athletic shoe company. This acquisition effectively combined two of the fastest-growing athletic footwear makers. Furthermore, in September 1987, Reebok purchased Ellesse International S.p.A., and Italian sportswear manufacturer for its shaky apparel division which was not doing too well.
I strongly believe that the horizontal integration strategy greatly attributed to Reebok's success. There are many advantages directly related to this strategy. Reebok was able to acquire distribution channels, technical knowledge, enhance profits, and finally create a favorable brand image of existing goods. However, I find it difficult to understand why the AVIA division was allowed to pursue its own strategies including aggressive competition with Reebok brands. That is unhealthy predatory competition of market shares within the same company!
Principal diversifications of Reebok.
Since Reebok has diversified into so many different show lines, it has a large number of competitors with whom to contend. However, diversification is also leverage, as if one market segment is facing a decline in sales, other segments are able to make-up for the losses. Rebok decided to diversify its shoe line to avoid becoming too dependent on a few lines of sneakers. The company has diversified into international markets and into several product niches. First, Reebok diversified into women's aerobic shoes. This was highly successful, since the company was able to get into a new market segment which was yet unexplored. Secondly, Reebok diversified into high performance walking and causal footwear. I believe that this was a good deal, since the profitability of Rockport remained high, and the company now had another product in its product mix.
The acquisition of Avia in 1987 effectively combined two of the fastest-growing athletic footwear makers in the USA. Furthermore, Reebok was able to add yet another product, a product which could satisfy the most serious athlete. This represented an excellent opportunity for Reebok to directly compete with its worst rival, Nike. I believe that this was a very good diversification. Brand image is crucial in this industry, and the quality products associated with Avia would enhance Reebok's brand image.
The fourth diversification occurred when Reebok's subsidiary, Rockport company, acquired the John A, Frye Company, which produced high-quality leather boots. These high-class, high-priced and high-quality boots would add another line of footwear to Reebok's product mix.
The fifth diversification occurred in 1987, when Rebok decided to purchase Ellesse International S.p.A., an Italian upscale sportswear manufacturer. Reebok used the company as a distributor in Italy. This diversification would aide Reeboks struggling apparel division. Nike did a similar acquisition in 1989 of Cole-Haan in order to improve styling of products. I believe that this diversification could increase the profitability of the apparel division, in which Reebok has very little experience in.
The final diversification was made in 1989, when the company acquired CMI's Boston Whaler unit, which manufactures and sells power boats for the US government and for recreational use. Since Reebok characterizes itself as a "marketing-type company", dealing mainly in sporting goods and leisure products with an upper-scale image, I believe that this diversification is questionable, but still within Reebok's product mix. Boston Whaler would become Reebok's first manufacturing operation, which could be a challenge for the marketing-oriented company. I believe that this is the most questionable diversification that Reebok made, since power boats have very little to do with foot-ware and apparel.
Differences in the strategies of Reebok and Nike.
The main difference in the strategies of Nike and Reebok is that Reebok has focused on more diversification, while Nike has focused on strict product development. Nike's long-term strategy is identical to Reebok's in the way that both companies are focusing at the high end of the market and maintain relatively high prices. Furthermore, both of the companies invest large amounts of money into marketing programs and into technological research and development in purpose to maintain combativeness in the highly competitive athletic shoe market.
In addition, Reebok has focused on a horizontal integration strategy, while Nike has only acquired Cole-Haan, a manufacturer of men's upscale dress and casual shoes. In contrast, Reebok has acquired over five companies since the beginning of the 1980's, including a wide array of shoe-product-lines including a apparel manufacturer.
To summarize, Nike focuses on the marketing of athletic footwear and apparel and has little activities outside these areas. Reebok, is diversified to a much larger extent, and is focusing on continuous expansion of its product lines. Both of the companies places heavy emphasis on consumer research, research and development, and on product/brand name image.
Major problems facing Reebok in 1989-1990.
The major problems that are facing Reebok in 1989-1990 are solely related to the organization and to the top management in particular. Virtually all indicators of financial performance for Reebok in recent years show strongly positive results, and sales are increasing.
In August 1989, two of the key personnel in the top management of Reebok resigned. The loss of these two personalities would be the main cause to the problems that are now facing the company. Joseph Labonte, the former president and operating officer who joined the company in 1987 and Mark Goldston, the former chief-marketing officer were great assets to the organization. Furthermore, they held key-positions in a marketing-oriented company operating in a highly competitive market. Both of the persons had managerial experience in multibillion-dollar organizations, and they had both extensive experience in heavy marketing and advertising of consumer brand names. However, none in the whole top-management team had any experience in the footwear industry.
The loss of these key personalities caused a managerial vacuum in top-management. Fireman, took the positions of chairman, president, and CEO. That is an impossible task. Fireman is trying to centralize the organization, and thereby divert responsibility to other key personnel. Still, each executive manager is responsible for too many jobs. For instance, John Duerden is the senior vice president and president, and CEO, Reebok Brands Division Worldwide.
The first thing I would do to improve the top-management of Reebok would be to get a "head-hunter" and find somebody who can take the President position, and the CEO position for Reebok International, Inc. In addition, I would ask Fireman to get back to his chairman position. (Please refer to the proposed layout of the new organization.) The President/CEO position and the Vice Chairman positions are now open.
Since Reebok is looking into international expansion, the complexity of the organization will increase. International subsidiaries have to be effectively managed and communication channels must be improved throughout the corporate structure. Fireman must realize that he cannot alone control all of the operations of the company anymore. He must start to delegate responsibility and start to trust people.